Global regulators and policymakers have grappled with the emergence of the crypto sector by adopting the principle, “same risk, same regulation” — however, a new paper argues that this approach is falling short when it comes to stablecoins, which pose novel risks to the global financial system.
A new bulletin from staff of the Bank for International Settlements (BIS) examines the policy challenges that are arising alongside the growth of stablecoins, and their growing links to the traditional financial system.
“Stablecoins’ rising market capitalization and increasing interconnections with the traditional financial system have reached a stage where potential spillovers to that system can no longer be ruled out,” it noted.
It argues that the principle of “same risks, same regulation” that has been adopted by global policymakers when dealing with the crypto sector is falling short — since these vehicles pose novel risks, given their borderless and anonymous features.
Stablecoins are a type of crypto that’s pegged to a currency and backed by liquid, low-risk assets. While they share some characteristics with traditional products — such as money market funds and ETFs — these instruments exist within regulatory frameworks and borders, whereas stablecoins can trade unconstrained and anonymously on blockchains.
Among other things, these features make stablecoins uniquely useful in illicit financial activities, such as money laundering. They also pose potential risks to monetary sovereignty, and the effective operation of monetary policy — and, they could “undermine the effectiveness of foreign exchange regulations or capital controls” in countries that use these mechanisms, the paper noted.
“Since ‘same risks’ does not apply, the prescription ‘same regulation’ has only limited bite,” the paper said. Instead, it argued for policy responses that are more tailored to the specific features of stablecoins.
“A bespoke framework for stablecoins should reflect their multifaceted nature while building on the regulatory experience from traditional finance,” it said. “Such an approach requires more customized strategies to address stablecoins’ unique characteristics and specific attributes, while leveraging the information provided by blockchains.”
More-tailored regulation also doesn’t imply weaker regulation, the paper said. “Since many entities within the stablecoin ecosystem operate without established safeguards, a more restrictive regime may be necessary than in traditional finance,” it noted.